2020 (1) TMI 1081 - HC - Companies Law

Lifting of corporate veil - recovery of debt - Personal liability of ex-director for the debt determined in favour of the first respondent, bank - the existence of a corporate borrower and the independent existence of its Directors, completely ignored - HELD THAT - It is well settled that a Limited Company incorporated under the provisions of the Companies Act, 1956 has a separate and independent character and it is a juristic person in its own capacity - The Directors are entrusted with the responsibility of looking after the affairs of the Company as entrusted to them by the shareholders by adopting due procedure prescribed in the Articles of Association. Unless there is a separate contract, the Directors cannot be held personally liable, as has been done in the present case. We do not find any merit in the arguments advanced by the learned counsel for the first respondent Bank in this regard and, therefore, the learned Tribunals have failed to appreciate such legal distinction in the facts before them. The matter remanded back to the learned Debts Recovery Tribunal-I, Chennai, for deciding the Original Application of the first respondent Bank afresh in accordance with law - petition allowed by way of remand.

Summary

Issues involved:
1. Liability of a director of a company for the debt determined in favor of a bank.
2. Interpretation of corporate law principles regarding the liability of directors of a company.
3. Application of the principle of lifting the corporate veil in the context of personal liability of directors.
4. Examination of the orders passed by the Debts Recovery Tribunal and Debt Recovery Appellate Tribunal.

Analysis:
1. The petitioner, a former director of a company, challenged the orders of the Debts Recovery Tribunal and Debt Recovery Appellate Tribunal holding him personally liable for the debt owed to the bank. The petitioner argued that as a director, he should not be held personally liable without a separate personal guarantee. The petitioner contended that the corporate borrower's liability should be limited to the assets mortgaged with the bank. The petitioner's counsel emphasized the absence of a personal guarantee by the petitioner in favor of the bank.

2. The High Court emphasized the separate legal identity of a company under corporate law, highlighting that directors cannot be held personally liable without a separate contract. The court criticized the lower tribunals for overlooking the distinction between the company and its directors. The court rejected the need to lift the corporate veil in the absence of established fraud, emphasizing that such action is warranted only in cases of proven fraud.

3. The High Court found fault with the lower tribunals for disregarding the fundamental principles of corporate law. It criticized the Tribunals for holding the directors personally liable without proper legal basis. The court highlighted the importance of specialized knowledge in Company and Banking laws for the tribunals, emphasizing the need for thorough examination of evidence and legal validity before fixing liability on individuals.

4. Ultimately, the High Court set aside the orders of the lower tribunals and remitted the matter back to the Debts Recovery Tribunal for a fresh decision in accordance with the law. The court concluded that the orders passed by the tribunals lacked legal basis and failed to consider the legal distinction between the company and its directors. The writ petition was allowed without costs, and related applications were closed.

This detailed analysis highlights the legal intricacies involved in the judgment, including the interpretation of corporate law principles, the liability of directors, and the application of the corporate veil doctrine in the context of personal liability for debts owed to a bank.